The sugar futures market in NY had an invigorating price recovery week, coming close to 12 cents per pound for the July/20 contract, whose options expire next Friday and the futures expiration is on the last day of this month. Friday’s sugar closing at 12.05 cents per pound represents a 112-point high against the previous week or almost 25 dollars per ton.
However, the real also had a great appreciation over the week, causing the American currency quote to close below R$5.0000, trading close to R$4.9600. For most mills what really matters is the closing in reals per ton. This Friday, the NY contract closed at the equivalent to R$1,373 per ton, about R$35 per ton above the previous week’s closing.
To illustrate the recent NY recovery, it is important to look at the price history recently practiced on the market. For instance, the average value of the daily closing of the sugar futures contract in April was R$ 1,229 per ton, while in May the average reached R$ 1,379 per ton and in June it has been R$ 1,359 so far. The mills that focused the fixations of their export sugar on real per ton did very well.
This June will be crucial to understand what strategy is to be used by the main market players as far as the magnitude of the sugar volume to be delivered against the terminal in July and October is concerned. We understand that the global economy still hasn’t entirely reflected the size of the hole in consumption caused by the coronavirus pandemic. We don’t have feasible elements right now which allow us to predict that even using a generous dose of optimism, Brazil will be able to export more than 30 million tons of sugar as some market analysts claim. The only exception to bringing this number into the field of feasibility would be if we had two gigantic deliveries.
Our point is about demand only, because logistics is not a problem. Brazil has already exported almost 4 million tons of sugar in a single month, in October/2012, so that can happen again.
I believe the mills should continue taking advantage of the profitable prices provided by the market for this and next crop. We have to watch the real trajectory closely, which has appreciated reflecting “who knows what”, as an economist humbly put it, acknowledging that we are not always able to see the market responses clearly. Sugar, for example, has risen following the trail of the macro scenario, fed by the funds (which are now long by only 8.700 lots), purchases fed by the algorithms of more excited small robots, and the improvement on the perception of the energy market.
Anyway, waiting on better prices and rosy scenarios in the midst of a pandemic which has already killed 35,000 people in Brazil, headed by a president who is a poet when his mouth is shut, is too big a risk for anyone. Therefore, it’s good to have discipline and focus. Since May, the correlation of the real with sugar has gotten to 83%, that is, each 1% of the variation in the real against the dollar corresponds to a variation of 0.83% of sugar in NY.
For a long time, men have longed to predict the future. Anything goes to foresee, predict, and anticipate what will happen ahead: you can use astrology, palmistry, tasseography, conchomancy, fortune-telling among so many available methods of guessing. The objective of using these “resources” is always the same: to be one step ahead of the events and make money, get prestige, power and so on.
The financial market is no different when it comes to forecasting (commodities price, exchange rate, interest rate, and so on). The amazing difference is that the methodologies of the financial market are more sophisticated, more elaborate, have a more elegant look, although often have a likewise debatable efficacy.
An economist friend usually says in his crowded lectures that the similarity between economists and astrologists is that both make mistakes on predictions, except the astrologists tell a much more interesting story than just the cold narrative of the numbers.
Several companies allocate hundreds of thousands of dollars into designing mathematical models that analyze distinctive determinant variables in the pricing of the commodities they trade and once this algorithm is created and the values dependent on it are collected, the program will provide the exact value that commodity should trade at and then the company will make millions and millions of dollars being one step ahead of the market, right? Wrong.
Models are important as one more available tool in the cockpit of the decision-maker. No model is capable of predicting sudden fluctuations on the market caused by exogenous factors, such as trade wars, the 2008 crisis, pandemics, September 11, Brexit, hurricanes, Brumadinho, Trump’s election, Bolsonaro’s statements, among others. No model can predict a Black Swan. However, I think models are important tools to help with the decision making as long as we don’t develop a huge dependence on them.
The simple parameters are more reasonable to decide on a pricing policy; for example, what is the production cost vis-à-vis the prices in real per ton, or how much a certain price level in real per ton affects the company’s EBIT, how much the company has to lock its sales price having in mind the exchange rate, the contribution margin, and so on.
Archer Consulting has a forecasting model of prices which are provided for the clients. Over the twelve months before the debacle caused by the global pandemic, the model had very good accuracy, fluctuating by 4% tops. In March, after the start of the global crisis, it took off by 20%. That backs up the maxim that says models work until they stop working. Let’s keep searching for the Philosopher’s Stone, though.
The good news this week is the line of financing passed by BNDES (National Bank for Economic and Social Development) of R$3 billion to finance ethanol storage.
We have been getting a lot of e-mails from people interested in the Intensive Course on Futures, Options and Derivatives – Agricultural Commodities. We are waiting for the opening of the hotels to be able to reschedule the course which was put on hold in March and start another group which could be onsite or online, giving the opportunity to those who have always wanted to take our courses, but due to the distance and logistics haven’t been able to yet. We will keep you posted.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
